The Brett Chulu
A VERY significant development in our economy happened this week — the Public Accountants and Auditors Board (PAAB) officially announced that listed firms will start publishing reports using hyperinflation accounting based on the International Accounting Standard (IAS) 29: Financial Reporting in Hyperinflationary Economies.
IAS 29 states the following characteristics as warranting the adoption of hyperinflationary financial reporting:The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power;
The general population regards monetary amounts not in terms of the local currency, but in terms of a relatively stable foreign currency. Prices may be quoted in that currency;
Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short;
Interest rates, wages and prices are linked to a price index; and The cumulative inflation rate over three years approaches, or exceeds, 100%.
There is no debate on the first pre-condition: indeed, the general Zimbabwean populace prefers to keep its wealth in US dollars, rands and in livestock. Property sellers are refusing offers made in the local currency.
The second pre-condition is very much alive in our economy — the general populace is indeed marking monetary amounts in rands and US dollars. True to the foregoing pre-condition — despite the ban on quoting in forex put in place two weeks ago by government by way of Statutory Instrument 212 (Exchange Control Exclusive Use of Zimbabwe Dollar for Domestic Transactions Regulations 2019) and Statutory Instrument 213 (Presidential Powers Temporary Amendment of Exchange Control Regulations 2019), the largely informalised economy is still quoting prices in forex.
The fulfilment of the third pre-condition in our economy is debatable, though heavy penalties and interest rates are being levied on those defaulting on payments. The general populace generally prefers cash sales, lay-byes (in forex) and surrendering of collateral in the case of loans.
In terms of the fourth pre-condition, we have a huge challenge — the publication of year-on-year consumer price index was suspended by government. Lately, we have not been receiving month-on-month inflation statistics — showing that the ban has de facto extended to month-on-month inflation statistics.
On the fifth pre-condition, the moratorium on the publication of year-over-year inflation happened when the year-over-year inflation was sitting at 175,66%, way above the IAS 29 threshold.
Consequently, it is not surprising that the PAAB came out this week saying the general market consensus is that the pre-conditions for the adoption of IAS 29 have been met.Several nuances emerge from this development.
Adoption of IAS 29 marks a point where the market is publicly recognising, albeit indirectly, what has already been fact, that there is a serious loss in confidence in economic policies.
Hyperinflation insinuation is a big thing insofar as market confidence is concerned. Battle lines between the government and the corporate sector have arguably been drawn; government has suspended the publication of year-on-year inflation statistics — the very data the corporate world needs to apply to restate financial figures transacted in prior to the end-of-period reporting date.
This will force the PAAB to use a substitute to proxy the inflation index, setting it on a collision course with government who, in all likelihood, will accuse the corporate world of usurping the mandate of the Zimbabwe Statistical Agency as spelt out in the Census and Statistics Act (Chapter 10:29).
I have taken the liberty to comb through the Act. Two things stand out. First, the term consumer price index is not mentioned at all. Second, the Act does not give a monopoly to the statistical agency on the publication of national surveys.
My reading into this situation is that government may have no legal legs to stand on to prosecute anyone who publishes a consumer price index. The PAAB may contract independent statisticians to come up with a price index that will be for the use of their members. They may even use Steve Hanke’s implied inflation rate, if they so wish.
They may decide not to lease Hanke’s method for the fact that Finance minister Mthuli Ncube publicly rubbished Hanke’s index as methodologically flawed — he famously quipped that there is no way the movement of a price of a share, one share for that matter, can be equated to the movement in the price of tomatoes.
The courts might come to the rescue of the PAAB: There is a court case going on where two entities represented by Tendai Laxton Biti have applied to the court to have the moratorium on year-over-year inflation statistics reversed.
In all this confusion, the investing community is watching from the sidelines, finding the data to confirm certain prior formed biases justifying their moves to keep their investment dollars away from Zimbabwe.
The accountants’ definition of hyperinflation is different from that of economists. A common definition of hyperinflation from an economic perspective is a situation where the general prices (not just the price of one item) doubles every month. From an economic perspective, we are not yet in hyperinflation.
Our weekly newspapers were going for ZW$2 last year (using the 1:1 parity ruling at the time) and today the same papers are being sold at ZW$20 — that is a 10-fold increase in 12 months. This still does not meet the economic definition of hyperinflation as it represents prices doubling every four months.
If we were under hyperinflation, the price of the weekly papers would be ZW$4 096. I need to be crystal clear on this: I am not watering down the fact that the price increases in our economy are astronomical and that the general populace is suffering immensely — all we are doing is to highlight a challenge we have in terms of applying the concept of hyperinflation in our economy.
Hyperinflation is a political hot potato — those in power have the incentive to keep a lid on it — it is a political economy game. The conundrum is that it is largely skewed government policies that are leading us towards hyperinflation (from both accounting and economics perspectives).
In my conservative estimation, broad money supply is at least ZW$18 billion, a jump from ZW$10 billion at the beginning of the year — this is accelerating inflation. The ZW$8 billion increase can be accounted for: ZW$5 billion came from the provision for the conversion of nostro accounts and ZW$3 billion came from the printing of money to fund pet government project (an economic adviser close to government has confirmed publicly what we had already estimated). We are back in the days of helicopter money.
Why do decisions that do not make economic sense keep happening? It is easy to explain: decisions that do not make sense from an economic perspective keep happening because they make political sense.
In extractive politics, resources are needed to keep a narrow but politically significant group happy in order to preserve and perpetuate political power. It is a well-known fact that it is not Command Agriculture that produces the bulk of the food in this country — but the ordinary farmers. We keep pouring a disproportionate amount of money into Command Agriculture because it makes political sense, not economic sense.
Here are the facts: In the inaugural 2016/17 season, 461 117 tonnes of maize out of a total of 1 210 559 tonnes were supplied by Command Agriculture, a mere 38%. In the 2017/18 period, by August, Command Agriculture had delivered a mere 21% (150 451 tonnes) of the total (722 149 tonnes) maize delivery.
Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — firstname.lastname@example.org.